Overview:
India has emerged as a focal point for foreign institutional investors (FIIs), attracting approximately $1.39 billion in inflows this week—the highest among Asian markets. This surge indicates a renewed confidence in Indian equities, suggesting that foreign investors are becoming more comfortable with current valuations.
Reversal in FII Trends:
The recent uptick in FII activity marks a reversal from earlier trends. In the first half of March, foreign investors had sold $3.5 billion worth of Indian stocks, particularly in the information technology and consumer goods sectors, due to concerns about the U.S. and Indian economies. However, the past week has seen a net purchase of $515 million in stocks by foreign investors, indicating a potential shift in sentiment.
Impact on Currency and Markets:
This influx of foreign capital has positively impacted the Indian rupee, which appreciated by 34 paise to close at 85.63 against the U.S. dollar on Monday. The currency’s strength is attributed to the bullish trend in domestic equity markets and the return of FIIs.
Policy Response by RBI:
In response to these developments, the Reserve Bank of India (RBI) plans to double the investment limit for individual foreign investors in listed companies from 5% to 10%. This move aims to boost capital inflows and counteract previous outflows that saw over $28 billion withdrawn since the NSE Nifty 50 peaked in September.
Caution Amid Optimism:
Despite these positive indicators, some analysts remain cautious about the sustainability of this rebound. Factors such as potential U.S. tariffs and concerns over corporate earnings growth continue to influence market sentiment. For instance, Indian stock markets ended a seven-session rally on Wednesday as investors booked profits amid uncertainties surrounding upcoming U.S. tariff announcements.
Corporate Earnings Performance:
Furthermore, the Nifty 50 recorded just a 4% profit after tax growth for the first nine months of FY25, with expectations of another quarter of moderate performance. Weaker-than-expected earnings have been a primary driver behind the prolonged sell-off seen in Indian stock markets over the last 30 years.
Conclusion:
While the recent FII inflows and supportive policy measures signal a positive shift in investor confidence towards Indian equities, ongoing economic and geopolitical factors warrant a measured approach to expectations regarding the sustainability of this rebound.
